Analysis: Fed-induced selloff has investors hunting for bargains

June 16, 2013|Reuters

(Gary Cameron Reuters, )

By Luciana Lopez, Sam Forgione and Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - Since Ben Bernanke unleashed a bombshell on May 22 by suggesting the U.S. Federal Reserve could before long start to pull back on its massive monetary stimulus, big stock and bond markets have been feeling the pain.

Rather than run for cover, a number of big money managers have seen the sell-off as a chance to invest cash in a broad array of assets at lower prices. They believe the gloom may be overdone, an overreaction to the concerns that the Federal Reserve won't be throwing money at the economy forever.

The U.S. economy has posted solid if still sluggish growth figures this year, and jobs growth has improved. The euro zone debt crisis has abated somewhat, with the monetary union no longer expected to drag so heavily on world growth. And despite the jitters, global central banks are far from ending easy money policies, pumping money into markets around the world.

Traders with big investors like Pacific Investment Management Company and Loomis Sayles & Company are taking advantage of buying opportunities they say they haven't seen in some time, with in-and-out hot money having flushed out of the system.

"We're finding a lot of opportunities coming out of the volatility," said Curtis Mewbourne, managing director and head of portfolio management for the New York office of PIMCO, which manages more than $2 trillion globally.

Bernanke said on May 22 the central bank "could in the next few meetings ... take a step down in our pace of purchases." This sparked an uptick in volatility that hasn't abated as investors recalibrate expectations for low bond yields that have bolstered borrowing and encouraged investors to take risks in other asset classes.

Japan's stock market has lost 19 percent since that day. The 10-year Treasury yield hit a 14-month high last week. The BofA Merrill Lynch U.S. high yield index slumped to a three-month low. The benchmark MSCI EM stock index is down more than 17 percent this year, and the dollar is near a four-month low against a basket of currencies .

One place Mewbourne is focused is government debt, even though it is the most sensitive to Federal Reserve expectations. He said it is a good time to buy five- and 10-year Treasuries, since he sees yields falling as the Fed hints it has no intention of slowing its stimulus program. He also sees more potential for gains in mortgages not guaranteed by the government.

The Federal Open Market Committee issues its next decision on Wednesday, and recently Fed officials have remarked that inflation is worryingly low, which might prevent them from reducing the $85 billion-per-month bond buying program, known as quantitative easing.

"We think that the Fed will signal to investors that the markets have overly priced in expectations for a reduction in quantitative easing," he said.

OTHER ASSETS WITH HIGHER YIELDS

Among the other assets that big money managers are now eyeing: high-yield debt; industrials and materials stocks; and some emerging market stocks and bonds.

Junk bonds have been feeling the effect of the rise in Treasury yields, with the Bank of America/Merrill Lynch High Yield Master Index losing 2.91 percent from its peak in early May. The past two weeks have seen outflows of nearly $9 billion from high-yield funds, according to Lipper, a Thomson Reuters company.

The 10-year Treasury yield touched 2.29 percent this week, highest since April 2012.

"The high yield market has gotten disorderly," he said. "When was the last time you had discounts like this? Yes, we are buying."

Investors have dumped U.S.-based corporate junk bond funds in droves, pulling out a record $4.6 billion in the week to June 5, according to Lipper.

High yield spreads are almost 500 basis points over Treasuries, said Paul Zemsky, chief investment officer for multi-asset strategies and solutions at ING U.S. Investment Management, which has $180 billion in assets under management.

"That represents good value, roughly six-and-a-quarter percent yield," he said. "If you can earn 6.25 percent from a bond, that's not so bad given we expect inflation to be low."

Emerging markets equity funds had outflows of $2.13 billion for the week ended June 12, the largest since February 2011, while EM debt funds had redemptions of $622 million, their third consecutive week of outflows.

"This has set up an attractive valuation picture both short and long term," said Jim McDonald, chief investment strategist, at Northern Trust Asset Management with assets of $810 billion, who said EM stocks are trading at a 22 percent discount to world equities.